TITLE:
The Equity-Efficiency Trade-Off in the Presence of Distorting Taxation
AUTHORS:
Basil Dalamagas, John Leventides, Stefanos Tantos
KEYWORDS:
Equity-Efficiency Trade-Off, Optimal Taxation, Fair Income Distribution, Growth, Incentives
JOURNAL NAME:
Theoretical Economics Letters,
Vol.13 No.4,
August
22,
2023
ABSTRACT: The purpose of the present study is to demonstrate how distortions that
arise from taxation could affect consumers’ behaviour and working time, which
might prevent Pareto’s maximisation process from achieving the objectives of
optimal trade-off between equity and efficiency. A utility maximisation model
is built up and the first-order conditions are manipulated to reach an
equilibrium between the MRS and the MRT. The validity of model is then tested.
In drawing a comparison of actual with optimal (in)direct tax rates, we find
that most of the countries considered have formulated a tax policy that favors
equity over efficiency, in terms of a static model, even though the
introduction of the dynamic model provides a less clear-cut outcome.